Legal and Ethical Issues in the Bishop Estate Scandal
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Legal and Ethical Issues in the Bishop Estate Scandal by Randall W. Roth In 1884 Princess Pauahi Bishop, the last acknowledged descendant of the Hawaiian monarch Kamehameha, placed the bulk of her land in charitable trust to establish and maintain two schools, “one for boys and one for girls … called the Kamehameha Schools.” The trust corpus—known as Bishop Estate—has been described by The New York Times as “a feudal empire so vast that it could never be assembled in the modern world,” and by The Wall Street Journal as “the nation’s wealthiest charity.” In 1997 four elders revered in the native Hawaiian community and University of Hawaii professor Randall Roth alleged massive trust abuse by the state’s most powerful people—among them judges, business executives, and legislators. Then, as described in a book review of Broken Trust: “Subpoenas fly, surveillance photos are snapped, phones are bugged, tires are slashed, judges cry in court, suicide factors in.” All five members of the state Supreme Court recused themselves from Bishop Estate matters, key legislators and others received prison sentences, and the IRS forced the removal of all five trustees. The following is an alphabetized list of selected ethical and legal issues from that period: ATTORNEY-CLIENT PRIVILEGE. Few courts outside of California allow trustees to use the attorney-client privilege to withhold important information about trust administration from the beneficiaries of private trusts, or from the attorney general with respect to charitable trusts. Yet the probate court ruled that the Bishop Estate trustees could use the privilege to withhold documents from Hawaii’s attorney general. ATTORNEY GENERAL’S “CONFLICT OF INTERESTS.” Bishop Estate trustees argued in court that the attorney general’s responsibility to protect charities (as parens patriae) conflicted with her tax-collecting duties (as in-house counsel for the state Department of Taxation). The trustees’ lawyers asked the judge to disqualify the attorney general because of this “conflict.” They also charged that the attorney general acted improperly by simultaneously heading up the civil and criminal investigations of the trustees. These matters were never finally resolved; they ceased to be relevant when the parties entered into a global settlement agreement. CO-INVESTMENT. Bishop Estate trustees created a conflict of interests when they invested personal funds in private business deals in which they had also invested trust funds. One reason for the restriction on co-investing is that trustees will be tempted to consider their own interests when making subsequent decisions about the investment (i.e., that they will throw good money after bad for the impermissible purpose of salvaging their own private investment). Bishop Estate trustees apparently did exactly that. COMMUNITY INTERESTS. Trustees of charitable trusts traditionally have been expected to pursue each trust’s specific charitable mission, even to the detriment of other community 1 interests. That may be changing. In 2002 the trustees of the Hershey trust voted to sell the Hershey Foods Corporation for $12.5 billion so they could diversify trust investments and increase dramatically the money available to pursue that trust’s educational mission. The Pennsylvania attorney general and probate court refused to agree, however, because of opposition from community leaders who feared that the new owner would move company headquarters and operations out of the state. Also in 2002 the new Bishop Estate trustees yielded to public pressure and withdrew from a long-standing legal battle over the trust’s right to divert mountain stream water for land-development purposes. Although this decision arguably hurt the trustees’ ability to educate as many children as possible, Hawaii’s attorney general and a court- appointed master supported the decision. COMPENSATION FROM OUTSIDE SOURCE. Trustees may violate the duty of loyalty by accepting compensation from a source other than the trust estate for acts done in connection with the administration of the trust. Yet Bishop Estate’s lead trustee for asset management placed himself on the boards of trust-controlled companies and collected large director fees in addition to $1 million in trustee fees. A more appropriate arrangement might have been to reduce the trustee fees so that the total compensation (i.e., fees received from the trust estate plus fees from trust-controlled corporations) would not exceed the value of that trustee’s services on behalf of the trust. CONFIDENTIALITY. Fiduciaries are sometimes subject to a duty of confidentiality. Bishop Estate trustee Lindsey claimed that trustee Stender had such a duty and then violated it when he told friends, and eventually reporters, about what went on at trustee meetings. Stender claimed that Lindsey violated a duty of confidentiality when she released to the media her “confidential” report on the quality of education at Kamehameha Schools. CONFLICT OF INTERESTS. Trustees must avoid conflicts of interest and take appropriate action when a conflict cannot be avoided completely. A Hawaii statute sometimes requires more: “If the duty of the trustee and the trustee's individual interest … conflict in the exercise of a trust power, the power may be exercised only by court authorization … upon petition of the trustee.” Yet Bishop Estate trustees often devised their own ways of dealing with conflicts, sometimes with astonishing results. On one occasion, trustee Peters “recused” himself as a Bishop Estate trustee just long enough to negotiate for the purchase of Bishop Estate land on behalf of the buyer. COOPERATION. Co-trustees are required to work together in the best interests of the trust, yet Bishop Estate trustees sometimes refused to share important trust information with each other, and their working relationships became strained to a point of physical violence. CRITICIZING JUDGES. Lawyers are allowed to criticize judges, but there are limits. Hawaii’s Supreme Court justices complained that the authors of the Broken Trust essay had “expressly and impliedly impugned the integrity, honesty, ethics, intelligence, qualifications, competence, and professionalism not only of the five members of the Hawaii Supreme Court as individuals, but also of the court as an institution.” These same justices were the ultimate authority on matters of lawyer discipline, yet they never took action against the lawyers who signed the Broken Trust essay. 2 CY PRES. A trust’s charitable mission can be changed legally only by showing that unforeseen circumstances have made the original mission illegal, impossible, impracticable, or wasteful. The standard is less stringent when the change would affect only an administrative provision (i.e., one that is a means to an end as opposed to the end itself). Bishop Estate trustees and Hawaii’s probate court sometimes have acted as if this rule does not exist. For example, in addition to maintaining the Kamehameha Schools, the trust functions like a land conservancy, providing culturally and environmentally sensitive stewardship for nearly 360,000 acres of non- income-producing land. Mrs. Bishop’s will says nothing about preserving the environment or Hawaiian culture. DELEGATION. Each trustee must remain responsible for, and exercise supervision and review of, all trust activities. Despite this rule, the Bishop Estate trustees utilized a “lead-trustee” system in which individual trustees functioned like chief executives for different aspects of the trust’s activities, making important decisions without first consulting with the others. DILIGENCE. Trustees have a duty to stay informed and to participate in trustee decision making. Yet one trustee stopped attending meetings because he considered the chaotic sessions a waste of time. He also felt that he could not influence the outcome of any issue because the other trustees ignored or ridiculed what he said. Even so, his failure to attend was a serious breach of trust. DISCOVERY ABUSE. When engaged in litigation, it is unethical for a lawyer to make frivolous requests for documents or fail to make reasonable efforts to comply with proper requests from an opposing counsel. Yet studies show that lawyers frequently seek more documents than they need and go to great lengths to avoid turning over embarrassing or damning documents that the opposing party has requested. Hawaii’s attorney general complained that the Bishop Estate trustees’ lawyers often failed to provide key documents, but at other times would provide an “avalanche” of seemingly unimportant documents. She asked the court to sanction those lawyers for abusive discovery tactics, but the judge chose not to do so. DISCRIMINATION. Mrs. Bishop’s will does not limit school admission to native Hawaiians, but it does authorize the trustees to set the admissions policy and to use a portion of each year’s income for “support and education of orphans, and others in indigent circumstances, giving the preference to Hawaiians of pure or part aboriginal blood.” With minor exceptions, Bishop Estate trustees have always reserved admission to Kamehameha Schools for children who have Hawaiian blood. Some critics argue that applicants with a relatively high quantum of Hawaiian blood should gain admission over those with lower levels, regardless of academic ability. Others maintain that any child who has been informally adopted by a Hawaiian (a cultural practice known as hanai), should be eligible to attend Kamehameha Schools. And then there are those